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Golden opportunity

The Indian obsession with jewellery continues unabated. But people have also started looking at other forms of gold as an investment.

Few nations are into heavy metal and hard rock the way India is. And if recent trends are anything to go by, the greed for glitter is only going to mushroom in the festive season. The yellow metal has risen about 45% in the past three years, triggering of an unprecedented change in the mindset of the world’s biggest gold market.

 Jewellery-loving Indians are now looking at bullion in the form of bars and coins as well. Such investment-led buying accounted for consumption of 135 tonnes of gold last year, up 34% over 2004, while jewellery demand was at 589 tons, up by 14%. The Indian representative of the Swiss gold refiner Pamp, Metloy Trading Services, which supplies coins and bars to banks, is reported to have seen its sales of gold coins and bars shoot up from the usual 400-500 kg per week to 1,000-1,500 kg per week in September.



Purchase price (Oct 2006 - Rs*)

Price estimate (Oct 2011 - Rs#)

Total post-tax returns %

Biscuit/bar (99.9% 24 carat)100771267223.18
Coin (99.5% 24 carat)99331267224.82
Hallmarked jewellery (22 carat)90001113221.32
Fixed deposits at 8% return100001469331.91
* Price for 10 g; 24 carat at Rs 8,800 per 10 g, 22 carat at Rs 8,000 per 10 g. Purchase price includes VAT, Sales Tax and making charges.
# Calculation assumes gold prices will rise by 50% in five years. Prices rose 45% in past three years.
At the time of resale, about 4% is deducted for coins/bars and around 8% in jewellery. Profits are taxed at 10%. The fixed deposit income is taxed at the highest rate.

Let us take a look at the pros and cons of the three types of gold investments—jewellery, coins and bars. The obvious appeal in buying jewellery is that you can use it and pass it on to your children as an heirloom. In that case it makes sense as an option. But don’t park your money in jewellery to cater for your child’s wedding in the future.

With the definition of trendy changing every season, chances are your children will balk at wearing the pieces you are lovingly collecting for them. Which means that you will have to sell the lot or get it remade. In both scenarios, there is money to be lost—at the time of resale, about 8% is deducted from the market price of jewellery, which is more than the deductions in case of coins and bars.

It is precisely such concernsthat the now widely available gold biscuits address. These bars come with a certified purity of 24 carat unlike hallmarked jewellery which is 22 carat. Once upon a time owning a gold bar could land you in jail. At that time almost all the imports were by illegal channels, a la Bollywood style. Now premium imported bars are available at the jewellers, and better still, at your neighbourhood bank branch. Also, the deduction from the current price of gold at the time of resale is around 4%.

A comparison of the returns from different forms of gold investment and fixed deposits, after taking care of the various deductions, show that for a five year period, the gold coin is the best investment option after fixed deposits. In addition to easy liquidity, it also gives a high high post tax return of about 24.82%. This calculation is based on the assumption that gold prices will rise by 50% in five years.

Since the price of bars includes the profit margin of the seller bank it is always higher than the current market price of gold. Bars have higher purity level than coins. That makes coins the cheaper alternative. Realising its appeal, banks such as HDFC Bank, ICICI Bank, Indian Overseas Bank and the State Bank of India are now offering gold bars and coins. The latter have been crafted specially for the festive season with embossed images of gods. Kotak Mahindra Bank has just launched gold bars in denominations of 50 and 100 g. It expects to sell about 100 kg of gold by the end of the year.

What makes investing in gold an option worth considering is that it helps diversify the portfolio and hedge risks.

Gold is like any other capital asset (such as house or land). If it is sold within three years, the gains are treated as income and taxed accordingly. In case of sale after three years, long-term capital gains come into effect and are charged a flat 20% tax on the gain after indexation. If the proceeds are invested in instruments that offer concession to park long-term capital (e.g. REC and NHAI bonds), the investor gets Section 54E benefits. So, this festival season, go for gold!

(with Sushmita Choudhury)

Soon, you may be able to invest in gold without actually having to buy bars or coins, courtesy the Gold Exchange Traded Funds (GETFs). These are mutual funds that will invest in gold, allowing investors to profit from any rise in gold prices without actually owning it. The GETFs will be listed on stock exchanges and their units can be traded on a real time basis just like shares of companies.

Benchmark Mutual Fund was the first fund in India to come out with the GETF concept. UTI Mutual Fund is also interested in launching a GETF. Recently, DSP Merrill Lynch Mutual Fund proposed an open-ended fund of funds that will invest chiefly in units of Merrill Lynch International Investment Fund’s World Gold Fund. However, the market regulator Securities and Exchange Board of India (SEBI) is yet to give its nod to these proposals.

But it has issued guidelines on how to calculate the net asset value (NAV) of these GETFs. Gold prices are currently reported through a city-wise poll of various bullion dealers across the country.

The formula for calculating the worth of the holdings of a GETF is more sophisticated and takes into account the price of gold in the international market, the custom duty payable on import of gold, the currency exchange rate, sales tax and other levies applicable on the transaction.

The value of the holding thus arrived at would then be divided by the total number of units issued to arrive at the value per unit. The price of GETF units is thus directly correlated to global gold prices.

Once the GETFs are launched, pressing issues such as differential quality standards and the need for storing the precious metal will also get addressed. So when are these products likely to get an approval then? Keep watching this space.

-- Tejas Bhope